value of life equation 1-1-18

Today’s blog post is a venture into the dark side of capitalism: putting a dollar value on human life.

Some people tell me that the Dragonpipe (Mariner East 2 pipeline) will be safe because it is in Sunoco’s interest to make it safe. Their argument: “Think of the millions in lawsuits they would face if there were a fatal explosion.”

Sunoco is very aware of that financial risk. They know that all pipelines eventually leak. (In fact, Sunoco has a worst-in-industry record for pipeline leaks.) They know how to calculate the potential costs of a leak and compare that with the profits to be made when the pipeline is in operation. Large corporations generally do calculations like this as part of the planning for any major project they undertake, so it is very likely Sunoco does too.

So let’s see how that works with the Dragonpipe, balancing operating profits against the potential legal costs of an explosion.

Pipeline revenue. If the Dragonpipe is completed as planned, it will move 450,000 barrels of “natural gas liquids” (mostly compressed ethane) to Marcus Hook every day, according to Sunoco’s own announcements. Sunoco will not own the contents, but will receive a fee per barrel from the companies that use the pipeline. That fee has not been made public but, based on other pipelines, it will probably be in the range of $2 per barrel.

Sunoco can therefore expect revenues of about $900,000/day in full operation. From that must be deducted their operating costs, but those will be minimal. Most of their cost is the up-front cost of pipeline construction. Let’s be conservative and assume $100,000 per day in operating costs. That results in net revenue of $800,000 per day.

Legal costs. In the event of an explosion, if it takes place in Delaware or Chester County, there is a very good chance that people will be killed. If it happens at the wrong time, in the wrong spot, hundreds could be killed. But probably Sunoco bases its financial risk analysis on averages, not worst-case scenarios.

So let’s contemplate the more likely case that only 10 people are killed, plus another 40 with severe burns or disabling injuries from flying debris. That would be on a scale with the natural gas explosion in San Bruno, CA in 2010. (See “What happened in San Bruno could happen here”.) Pacific Gas and Electric paid out $565 million in damages in that case, including multiple millions to each of the families of those who died, and smaller payments to those with injuries.

Based on the San Bruno example, we’ll assume that Sunoco pays about $600 million in damages when an explosion occurs. Is that a big deal for Sunoco? Well, it certainly is an undesirable financial outcome for them, but it isn’t a show-stopper. In 750 days of pipeline operation (about two years) at $800,000 per day, Sunoco would pay for that settlement.

In effect, Sunoco is betting that such an accident will occur less often than every two years. If so, the investment is a good one from the business point of view.

I imagine it is by this type of reasoning that Sunoco reaches the conclusion that they can take the risk that the Dragonpipe will leak (and fatalities will occur) because the cost to them is likely to be less than the money they make while the pipeline is operating. There’s a good chance it will operate without an explosion for well over two years at a time.

This is a wrong-headed conclusion. It is not the arithmetic that is wrong, and it is not the profit motive that is wrong.  Where Sunoco’s reasoning goes wrong is failing to acknowledge that there is a moral aspect to this decision that goes beyond spreadsheets and ledger books.

We cannot allow lives to be treated as mere dollar amounts, as Sunoco is doing.